On Target

In this issue:

  • Investment returns
  • Renewables’ icy future
  • Taiwan
  • The Capitol riot
  • Commodities
  • Rare earths
  • Covid19 mysteries
  • Infotech

Maximizing Your Investment Returns

The first thing most people look at when considering an investment is the annual rate of return they expect to be able to make out of it. Return is the “rent” you enjoy as payment for investing your capital rather than going out and spending it, and also the “reward” for the risk you take.

The return usually, but not always, consists of two parts – income and capital. The cash element is usually paid annually or more frequently, but is easily understood as being at an annual rate. The capital element of the return – the profit you make when selling an asset compared with what you paid for it – should always be converted at an annual rate and regarded as return in exactly the same way as income.

Return taken in the shape of a capital gain has the advantage over most kinds of income in that it is usually tax-free or taxed at a lower rate. But income offers the advantage for many of being in the form of a steady and stable flow of cash. You can always sell a portion of a capital asset for cash, but that becomes tiresome if you need to do so every month.

In considering any investment, you should add together the income and the capital gain you expect to make, and express that at an annual rate as a percentage of the capital value of your investment.

The capital you invest includes not only the “price” of the investment, but also the cost of making it. For example, if you buy shares, in addition to paying the price of the shares asked by the seller, you also have to pay costs such as brokerage fees and duty charges. Return should be calculated, not on the selling price of the shares, but on their total cost including all charges and taxes.

There are several pitfalls to watch for when comparing the rates of return offered by different investments. What professional advisers tell you is not necessarily the whole story.

Firstly, there is the compounding factor.

When making an investment you are entitled to a return on the return itself, unless  you are drawing all the return in cash, as in the case of interest paid on a

loan stock. It is usual to assume that the return you enjoy on your ploughed-back return is at exactly the same rate as the return on your original capital investment.

There can be an enormous difference between a COMPOUND rate of return and a SIMPLE one, as the following example shows.

Suppose the value of an asset such as an extremely rare antique is expected to increase from $1,000 to $10,000 over ten years.

It may be claimed that the average annual rate of return on money invested in such an asset would be 100 per cent as $1,000 increasing at 100 per cent a year will accumulate to $10,000 after ten years. In fact the figure would be 25.9 per cent. If the asset yielded an average annual rate of return of 100 per cent, taking into account ploughing-back of return each year as well as the value of the original capital, its value after ten years would not be $10,000 but… $1,024,000!

You should always use compound rates of return to compare investments. It’s easy to calculate them using a financial calculator.

A second pitfall to watch out for when making comparisons is inflation.

If you invest $1,000 in a fixed-interest security yielding say 2 per cent and plough back your return every year, but inflation averages 4 per cent a year, then after ten years your original capital will have grown to $1,219 – but its purchasing power will be only $817 in today’s money.

It is important to differentiate between a nominal or ordinary rate of return (one that has not been adjusted to take inflation into account) and a REAL rate (one that has been adjusted for inflation).

Making accurate comparisons of rates of return

When comparing such rates it is common to ignore sometimes substantial differences between the buying and selling prices of the asset. You should always try to estimate this difference – the buy/sell margin – and adjust downwards your forecast rates of return to allow for that.

Another pitfall – affecting all investments that produce a regular cash income – is that you cannot make an accurate comparison of rates of return unless you know the frequency of payment or calculation of interest that is automatically reinvested (annually, quarterly, monthly, daily?), and whether it is paid in arrear (the usual basis) or in advance.

For example, a 10 per cent rate paid annually is worth 10 per cent, but if it’s paid half-yearly, it’s actually worth 10.25 per cent; if quarterly, 10.38 per cent; if monthly, 10.47 per cent; and if quarterly in advance, 10.64 per cent.

So before putting your money into any fixed-income investment, find out first how frequently the income accrues, and whether you will be paid in arrear or in advance. It does make a difference.

Rates of return vary from one investment to another because they reflect varying factors such a risk and liquidity (ease of conversion into cash). They also vary from time to time as circumstances change.

It is possible to lock yourself into fixed nominal rates of return from certain kinds of investments, but this in itself carries an inherent risk that rates offered on the same investments, newly made, may rise, leaving you stranded earning a lower rate.

Forecasting a rate of return is always tricky, but you should take a crack at it if you want to compare alternative investments. At the very least, it will alert you to some of the dangers and opportunities in particular investments.

Planning for an Icy Future

In Germany the harsh winter has conveyed dramatic warning of how nasty life will become as it proceeds with its extreme Energiewende policy to rely on renewables to meet its electricity needs.

A few days ago, as snow blanketed the country, power supplies from solar panels and wind generators almost disappeared; the nation depended almost totally on traditional energy sources – coal, gas and nuclear. But remaining nuclear stations will be shut by 2023;  coal and gas are to be phased out completely as part of the European Union’s Net Zero Carbon plan.

William Engdahl, the geopolitical commentator, says the strategy is already an economic catastrophe. “Going from having one  of the industrial world’s most stable, low-cost and reliable electric generation grids, today Germany has become the world’s most expensive electric generator,”

As coal is being phased out, traditional energy-intensive industries such as steel, glass, chemicals, paper and cement manufacturing are facing soaring costs and shutdown or offshoring.

The German push to end transportation by petrol and diesel cars by 2025 in favour of e-vehicles “is on course to destroy Germany’s largest and most profitable industry, the auto sector, and take down millions of jobs. The lithium-ion battery-powered vehicles have a total carbon footprint, when the effects of mining lithium and producing parts are included, that is worse than diesel autos. “The energy-inefficient wind and solar today costs some seven to nine times more than gas.”

Germany already has some 30,000 wind turbines – more than anywhere else in Europe. But the gigantic machines cause serious problems of noise and health hazards for people and birds. “By 2025 an estimated 25 per cent of existing German windmills will need replacement, and waste disposal is a colossal problem.”

Another place to receive early warning of the nasty consequences of policies designed to combat global warming is Texas, where an ice storm froze wind turbines, the source of a significant portion of energy supply. Last year there was a similar climate crisis in California, where record heat swamped demand for power for air-conditioning because supply has become too dependent on solar and wind turbines.

“Here is the paradox of the Left’s climate agenda,” says commentator Mike Shedlock – “the less we use fossil fuels, the more we need them.”

A World Leader in Chips and Fighting Covid

War risk is “consistently underestimated by money people” says FT commentator John Dizard following the escalation of tensions between China and Taiwan. The latter runs itself as a highly successful independent nation, but China insists it is a breakaway province that it is determined to recover.

In recent weeks China has sent several batches of its warplanes into Taiwan’s air defence identification zone as part of war games simulating missile attack on the US aircraft carrier Theodore Roosevelt – the kind of public posturing that could easily trigger violent conflict should Taiwan be provoked into shooting down such intruders.

That may sound farfetched. But who predicted the devastating pandemic?

There are grounds for fearing war over Taiwan. Chinese president Xi Jinping has publicly threatened, presumably by deploying its massive armed forces, to end Taiwan’s 70-year-long rebellion as it “cannot be passed on from generation to generation,” suggesting that he intends to resolve the issue before he leaves power.

The Americans, on the other hand, have increasing reasons for making sure that the island remains safe from Chinese attack.

Semiconductor chips are well on the way to becoming the world’s most important industry as they are essential components in so many things – electronic gadgetry, cars, aircraft, telecoms equipment… and, increasingly, weapons.

80 per cent of the world’s supplies are made in Asia, including most of the advanced chips. Taiwan is the most important design, development and production centre. The newly-opened $20 billion factory of TSCM in the south of the island is one of only two in the world that can churn out “frontier” micro-chips measuring just three nanometres (billionths of a metre).

Driven by fear of Chinese rising power, the Americans say they must have strategic supremacy in semiconductor chips. “How can they have that,” Dizard asks,” without Taiwan, the Ruhr of the electronic age?” [The explosive growth of Germany’s heavy industries there led to the first world war].

Recently the US has been strengthening its public commitment to Taiwan. The Trump administration lifted its self-imposed restrictions on diplomatic contacts and authorized sales of advanced weaponry. The Democrat administration is sticking to a similar tough line: Joe Biden broke with precedent by inviting Taiwan’s representative to his swearing-in ceremony.

Although the Chinese desire to rule the island is primarily a political imperative, the prospect of gaining control over the world’s leading chip industry is clearly of increasing importance. A domestic world-class semiconductor industry is one of the big missing ingredients to China’s ascension to number one position internationally.

Considering the extreme difficulty in implementing an invasion across the 180-kilometre Taiwan Strait, the logical alternatives would be to use naval forces to force the island into submission or air attacks to destroy its factories in a beggar-thy-neighbour strategy. Given America’s commitment to Taiwan’s defence, it would be another Cuban missile crisis.

It could happen within a generation, but doesn’t look like an immediate prospect.

Last year was a devastating year for the world, but an excellent one for Taiwan. It was the first country to identify Covid-19 as a killer virus and report it to the World Health Organization and the first to start screening arrivals from Wuhan. Its contact-tracing and other policies were so well-organized and effective in containing the virus that the death-toll in this country of 24 million has been just nine. The island never went into a full lock-down.

The economic damage done by the pandemic has been so limited that last year it was one of a small handful of countries that achieved positive growth. Exports rose 5 per cent as its factories were well-positioned to serve global demand for products such as tablet computers and headphones as millions were forced to stay at home. Its all-important semiconductor sector has also gained from China’s diversification away from US suppliers in the ramping up of 5G technology, and from the Trump administration’s tariffs on Chinese products, which encouraged Taiwanese with operations in China to move their production back to Taiwan.

Domestic factors have also spurred the economy. A renewed capex cycle has been reflected in improving consumption. The property market has been heating up , with real estate lending accounting for 36 per cent of all bank loans.

Jefferies’ global head of equity strategy Chris Wood reports that Taiwan’s stock market was Asia’s second best performer last year, after being the best in 2019. From a valuation standpoint the bourse is now trading on 19.6 times forecast earnings growth of 14.7 per cent

The dominant tech sector accounts for three-quarters of listed stocks. Chris’s choices are TSCM, Silergy and MediaTek. I also like Novatek Microelectronics.

The Capitol Riot: False and Exaggerated Claims

Pulitzer prize-winning journalist Glenn Greenwald opens up a can of worms…

► Police officer Brian Sicknick was murdered by a pro-Trump mob that beat him to death with a fire extinguisher. Was he? There is no doubt that he died, but how? The law enforcement officers cited as the sources of the story have never been revealed. No videotapes have ever been identified although there were hundreds of cellphones recording the mayhem. There are no photographs of the death. No autopsy report has been released. And no details have been provided by any official source.

The reason could be, according to one law enforcement officer, that medical examiners did not find that Sicknick sustained any blunt force trauma. On February 2 CNN, an impeccably liberal source, asked why nobody had been arrested for what was clearly a serious crime. CNN said investigators are “vexed by a lack of evidence that could prove someone caused his death as he defended the Capitol.”

► Sicknick’s death is the only example the media had of a pro-Trump mob deliberately killing anyone. But there is “almost no evidence to substantiate it.” None of the other four deaths were at the hands of the protesters. The only other person killed by deliberate violence was the unarmed protester. Ashli Babbitt, shot by a policeman at close range. The other three were also pro-Trumpsters who died from natural causes or were crushed in a crowd.

► What proof is there of a planned armed insurrection? How many firearms were confiscated? How many shots were fired? (Only one shot was reported).

“There is no evidence of anyone brandishing a gun in that building,” Greenwald says. Acting US Attorney Michael Sherwin has admitted: “There is no direct evidence… of kill/capture teams and assassination.”  Despite the scary warnings of violent protests on Inauguration Day with a quarter-million National Guardsmen on duty in Washington, there was nothing more than a smattering of peaceful protests outside statehouses around the country.

“The most dramatic claims spread by the media to raise fear levels as high as possible and depict this as a violent insurrection have turned out to be unfounded – or were affirmatively disproven,” Greenwald comments. “One can – and should – condemn the January 6 riot without inflating the threat it posed. One can — and should — insist on both factual accuracy and sober restraint.”

A Coming Supercycle for Commodities

Prices of commodities are surging despite the fact that economies, many of them still in the grip of lockdowns, are still far from full recovery from the pandemic.

Jefferies’ Chris Wood reports that the Bloomberg Industrial Metals Index has risen nearly 10 per cent so far this year – up 62 per cent from its 2020 low – with a handful of materials having risen spectacularly. Platinum, expected to be a prime beneficiary of the renewables energy boom, is up 115 per cent from its low last year. Oil, the biggest commodity in international trade, is benefitting from both contracting supply (US production has now fallen by 2 million barrels a day to 11 million) and improving demand (Chinese consumption hit 14.7 barrels/day by end-September).

Despite all the talk about the end of fossil fuels, global demand for oil has now recovered to about 94/95 million barrels a day, only 5/6 million b/d below the all-time peak of 100 million recorded in 2019.

“That gap is almost entirely explained by a decline in jet fuel demand, the continuing consequence both of countries’ closing their borders and/or imposing over-the-top quarantines on returning residents.” The oil price can easily surprise on the upside – Chris says he anticipates perhaps $100 a barrel – “if the health fascists ever allow the world to reopen again.”

The same applies to copper. It won’t be easy to boost supply. There is a lack of big new projects coming on stream. Another positive is that “the now-fashionable activity for generating electricity from ‘renewable’ sources is also very copper intensive.” Renewable energy systems use four to 12 times more copper than traditional ones. “It is entirely feasible that copper replicates, if not improves upon, the six-fold increase in prices it managed in the last copper bull market.”

In “soft” commodities agricultural prices have been soaring. Since the start of the century consumption growth of foodstuffs has escalated driven by wealthier populations in China and other emerging economies. Farmers raising cattle, hogs and poultry are being squeezed by the highest corn and soybean prices in seven years.

Investment banks such as Goldman Sachs and JP Morgan say we are in the early foothills of a Himalayan supercycle for commodities.

Challenging China’s Rare-Earths Dominance

The Pentagon has awarded $30 million to Australia’s Lynas – the world’s leading specialist outside China in mining rare earths – to develop a processing facility in Texas.

Rare earths are 17 minerals which are considered essential components in electronic devices such as smartphones, electric cars and wind turbines – but especially in weaponry such as ballistic missiles, drones and aircraft. F-35 fighter jets need 417 kilos of the stuff for their guidance systems; US Navy fast-attack submarines need more than four tons.

Trouble is, China controls more than 80 per cent of world supplies. Even the US, which does mine some rare earths, has to ship its ores to China for refining. A critical element of the nation’s arms production depends on a strategic military rival. Which has threatened to cut off supplies in a tit-for-tat move following America’s bans on supplies of advanced silicon chips.

The main problem associated with rare earths is not that they’re actually rare. They’re found widely. The problem is that processing them is difficult and extremely messy, so no country wants to allow it. Waste includes contaminants that are hard and expensive to deal with such as radioactive thorium, uranium, cadmium, lead and mercury, all of which can poison water and soil and cause cancer.

China is prepared to accommodate this nasty business as the price of world dominance of a key supply chain. America is preparing to cut the link.

Big Mysteries About Covid-19

There are still a lot of uncertainties about the deadly virus and explanations offered by the “scientists” – most, but not all of them – are unconvincing.

► Why has no-one died from influenza since the pandemic erupted? This is clear from some of the evidence that has leaked out such as statistics from Public Health Canada that showed spikes in flu deaths in March to November every year from 2015 to 2019 – but none attributed to flu occurring last year.

Some commentators claim that the virus is nothing more than a nasty flu, which is why deaths attributed to that commonplace disease have suddenly disappeared from hospital statistics.

► One thing we do know for certain is that Covid-19 isn’t much worse than a nasty flu. British prime minister Boris Johnson said on television that the average risk of death for men aged 60 or older in the UK was only ten in every thousand – that is, 1 per cent – from the original virus, or 13 to 14 per thousand for the later, nastier, variant.

► A high proportion of the positive results of those up-your-nose PCR tests are false, while even the correct ones cannot differentiate between active and inactive virus. Asymptomatic people are forced to quarantine when there is virtually no risk of their being infectious.

►There is no convincing explanation why the death risk differs so enormously between different regions and racial populations. Recent figures were for average mortality of 1,080 to 1,674 Covid deaths per million in Europe’s hardest-hit countries but only 5½ in China and neighbouring countries. In Thailand, where I live, with a population roughly the same as the UK’s, only 83 have died.

Year of Zuna, Year of Lame

This will be a year of reckoning for the infotech industry says Richard Waters. “Which of the ‘pandemic wonders’ – companies buoyed by the emergency – have real staying power, rather than simply sold a temporary fix for a world in pain? And are the industry’s claims of reaching an inflection point in the shift to a more digital economy valid, or just a Covid-19 mirage?

“Last year was defined by what could be called Zuna: when you’re finished with the Zoom calls, you can order dinner on Uber Eats, then settle into some Netflix watching and do some Amazon shopping. At some point in 2021, as digital consumers edge further back into the real world, they might spend more time on Lame: booking a Lyft ride, organizing a weekend away on Airbnb. finding a non-virtual date on Match, or booking vacations on Expedia.

“How much of the digital behaviour learned is now ingrained?”

Few companies are likely to go back fully to pre-pandemic ways. Most will try to lock in any processes that have saved them money or increased worker productivity, while increasing their business resilience to future shocks.

How far all this will go to support the soaring stock market valuations is another matter. After their long run the valuations of companies such as Apple and Alphabet are at more than 50 times this year’s expected earnings.

A Victory for Putin

After months of international scepticism, it has become clear that Russia has scored a major success with its anti-Covid Sputnik vaccine.

Its efficacy rate above 90 per cent equals that of the Pfizer and Moderna treatments, but without their need for extremely low temperatures for storage and distribution. 20 countries, including key markets like India and Brazil, and even European Union member Hungary, are buying the vaccine or lining up to do so.

Its structure is similar to the revolutionary messengerRNA design of the Pfizer and Moderna vaccines, but instead uses a genetically modified adenovirus. It could be described as a DNA vaccine, and is inherently more stable.

The Biden Risk

For the moment, America’s policymakers want to continue inflating the fiscal/monetary bubble.  Money to stimulate business and employment recovery from damage done by the pandemic. Money to save poorly managed Democrat state governments from financial disaster. Money to pay for new priorities, which Treasury Secretary Janet Yellon lists as “inequality, racism and climate change.” Very probably a lot of money for a big infrastructure renewal plan, too.

One consequence will be inflation. Almost certainly a lot of it. The danger is that both Yellen and her policy partner central bank chief Jerome Powell will take far too long to slam the brakes on rising prices. That’s the big risk for investors in 2021/22.


Tourism: Tiny countries whose businesses have been devastated by the pandemic have developed a counter-strategy that seems to be effective. They are going out of their way to attract as residents those who can work from home even if physically located a long way from their markets.

Barbados was the pioneer, offering a one-year remote-working visa to applicants earning $50,000 or more a year to applicants from an employer based outside the country. Other Caribbean island nations such as the Bahamas, St Lucia, Bermuda and Antigua have followed the model to attract the “digital nomads” able to work from home in places that also happen to be nice places to live.

Apps: Who would have thought that in 2021 we’d be using a Russian program to communicate without censorship and to protect free speech?

Last month Dubai-based Telegram, founded by Russian entrepreneur Pavel Durov, became the most downloaded app in the world. Telegram and the Signal service promoted by Egon Musk have become wildly popular since Facebook’s Whatsapp told its 2 million users that they would have to accept the new terms of its privacy policies if they wished to keep using its free messaging service.

Many American conservatives have been booted off Facebook, Twitter and YouTube in an ideologically-driven purge by Silicon Valley Leftists.

Nuclear power: Biden’s plan for a “clean energy revolution” accepts nuclear as one of its components. It favours small modular reactors as one element of acceptable technologies.

In the past many carbonatics opposed nuclear, which has always been a zero-carbon technology, because of its risk to the environment from disasters. Others argued contrarily that the world cannot refuse to use it because of its capacity to deliver carbon-free base-load electricity without the well-known disadvantages of renewables such as intermittency.

Clearly that argument has now been won.

Woke report: San Francisco’s Board of Education has targeted Dianne Feinstein by removing her name from a school named after her. She is no obvious target for the current wave of lunacy to rewrite history by “cancelling” those accused of past association with slavery. She is a pillar of the Democrat establishment as US senator for California, the most important Democrat state. Her “crime” is that 36 years ago, when she was mayor of San Francisco, she allowed a Confederate flag to be one of a large display of historical flags.

Property: Proof that Hong Kong’s economy is not collapsing is news of a record-breaking transaction. A 364 sq.metre luxury apartment in Mid-Levels sold for 459 million HK dollars – reportedly the most expensive ever sold in Asia.

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